The Price We Pay

by Marty Makary

  During the meeting, one woman at the lumber company began to fret about the rising health insurance costs. She asked a few questions and complained a bit. It was a reaction with which Contorno was very familiar. He knew how to manage “sticker shock,” redirecting her anger toward hospital costs, technology, drug companies, and even people who don’t exercise enough. It was a routine. Contorno, an empathetic listener, was a pro at rotating cannons to ensure they were aiming off the ship.

  But as Contorno blamed external factors and assured them that renewing with their present health insurance carrier was their best option, an older man sat silently in the corner of the room. With his worn work clothes and weathered skin, he exuded the authority of a lumberyard manager. At the end of the meeting, when Contorno offered to answer any questions, the old man spoke up. “Don’t blow smoke up my ass,” he erupted. “My wife can’t even afford her multiple sclerosis medication and you come up here in your limo! We’re struggling, and all you people are getting rich off of us.”

  Despite the old man’s protest, the company signed the renewal contract, and Contorno left. But as he stepped back into his limo he felt a sense of shame. He knew his kickback for getting the contract renewed would be hefty. And on top of that he would get paid a handsome 4% of whatever the lumber company spent on health insurance premiums each month, as has become standard in the industry. Contorno just made a lot of money, but he left feeling deeply conflicted. He couldn’t stop thinking about the scolding he’d received from the old man or about the man’s struggling wife. The experience gave Contorno a crisis of conscience, and he changed. That next day, he committed his brokerage firm to a new way of selling health insurance, one that liberated him and his colleagues from the perverse incentives of insurance company commissions and kickbacks.

  In subsequent meetings with clients, Contorno spoke freely, no longer beholden to insurance companies. He began recommending health insurance options based on what was the best value for employers, rather than the ones that paid him the most. Contorno felt uninhibited. “It was a great feeling,” he told me as we discussed his experiences, adding that he saw clients save millions by being put into the best health plan for them.

  One of those businesses was the Gerry Wood Auto Group. Gerry began selling cars in 1994 and grew his North Carolina small business from one to three dealerships: Honda, Kia, and Chrysler. The company now employs 175 full-time workers. I called Gerry to ask him about his experience buying health insurance for his business.

  “My business was constantly getting hammered with health care costs,” Gerry told me. “It’s our single biggest line item.”

  Gerry had bought insurance in the past through a random broker who claimed to be an “independent benefits consultant.” Later Gerry learned that, like most brokers, the insurance companies he sold for paid him.

  “He wasn’t straight with me,” Gerry explained. “I had no idea what was going on. Nor did my friend that used the broker for his flower business. I’m in the car business, not in the health care business.”

  What triggered Gerry’s call to Contorno was a letter he received from the health insurance company about another big rate hike. Contorno, now on a crusade to be honest with clients, had switched from commission and kickbacks to a performance-based consulting model of compensation. Contorno sat down with Gerry and gave him every option, free of bias, and recommended the best one for his employees.

  Gerry had been spending $650,000 a year to United Healthcare to cover his employees. Contorno advised him to cut off that contract and instead set up a $475,000 fund to self-insure the health care of his employees. Contorno added catastrophic insurance coverage to protect Gerry against any individual costs over $100,000. Contorno offered him catastrophic insurance from one of 20 “stop-loss” carriers who sold these policies across state lines. Unlike the very limited options for traditional health insurance carriers, stop-loss insurance was sold in a robust market, where competition kept prices low.

  Gerry explained to me how the new benefits structure did not limit choice of doctors and saved his business more than half a million dollars over three years, money he used to reinvest in the business, renovate his mechanic shops, and give his employees better retirement benefits.

  But Contorno’s commitment to do the best for clients came at a price. A few months after he began recommending that employers switch to better value plans, he received a nasty letter from Blue Cross Blue Shield of North Carolina. They essentially blackballed him. They wrote that they were deappointing him and would no longer do business with him or pay him commissions.

  Contorno is a particularly bold and talented man. He was able to attract enough business to stay afloat, and today his company, EPowered Benefits, has expanded across the country. With a business model of charging a consulting fee and not accepting commissions or kickbacks, EPowered Benefits is now thriving, saving employers across the country millions of dollars.

  Contorno’s story was enlightening, but I wanted to learn more about the people who buy, sell, and rent access to medical care. I decided to fly to Orlando to attend a health insurance broker conference.

  I seemed to be the only doctor at the conference, and I was surprised by how easy it was to talk to people. I simply told some of the brokers I met that I’m a doctor trying to learn more about how health insurance gets sold to employers in America. One broker, Phil, offered to talk with me over drinks one night. There at the hotel bar, Phil and his broker friends laid it all out.

  “Marty, the dirty little secret in health care that no one is talking about is the way we brokers get paid,” Phil said. He was about to retire so he wasn’t worried about breaking the code of silence. He said he simply couldn’t stand it anymore. “I went into this business because I thought it was noble to advise employers on the right health insurance coverage for their employees. But this business is not what I thought it was.”

  That night, I learned things they don’t teach in health policy textbooks or graduate schools. I learned, in vivid detail, exactly how insurance brokers get kickbacks for selling health insurance and pharmacy benefit manager plans to employers, just as Contorno had explained to me. I realized that brokers are often the shepherds leading the sheep. They can convince an employer to buy an overpriced plan or a great value plan. They can convince an employer to switch insurance carriers, stick with their current carrier, go to the mat for a better price, or bypass health insurance and simply self-insure. Brokers have a lot of power. Employers grow to trust them. But what employers don’t know is how insurance companies use cash to control the brokers. At the Orlando conference, I heard story after story of companies calling brokers to dangle a big bonus in front of them if they kept an employer on the hook.

  I barely knew what a health insurance broker did before I attended that conference. Phil and his colleagues got me up to speed fast as we sipped piña coladas in the Florida heat. Slouching back in cozy chairs at the terrace bar, they spoke candidly about the business. I was leaning forward, taking notes, my eyes popping out of my head.

  “The way brokers are paid is one reason people are paying too much for health insurance, and I can’t believe no one is talking about it.” Phil said. Throughout his career, he had regularly been offered hundreds of kickbacks from insurance companies, ranging from $30,000 to $100,000 (often referred to in the industry as “bonuses,” “overrides,” “persistency bonuses,” or “contingent income”).

  “Sometimes that money pushed me to put employers into plans that were way too expensive for them,” Phil admitted.

  But as I learned from Contorno’s experience of getting blackballed by Blue Cross Blue Shield of North Carolina, health insurance companies don’t just use carrots, they also use sticks. Brokers told me if they lost a key employer, an insurance company might “fire” them from their entire book of business. That means the broker would be cut off from the gravy train—the 1 to 5% commission on every premium dollar the broker had brought to that compan
y. That’s a few hundred dollars per employee going to the commission payout every year! And as the employers’ costs rise, so, too, does the broker’s revenue. One broker, who switched an employer to a different health insurance plan, told me how he got blackballed, then trash-talked by the carrier who was telling other employers to avoid him simply because he was fired from working with them. The bad-mouthing was not merely to get revenge on that one broker. It sent a signal, loud and clear, to other brokers who might want to encourage employers to switch to a different plan.

  The Fog of Benefits

  Brokers do provide an important service. They help explain the insurance benefits and sort through the options for people.

  I enjoyed my candid conversations with insurance brokers in Orlando. They were not bad people. They are just responding rationally to market forces. Some told me how they would do what’s best for their client even if it meant a lower commission for them or forgoing a bonus, but that was not the norm. Many brokers unloaded the dirty way insurance companies paid them because they dislike the system. Some hated the commission and kickback structure. They had gone into health insurance sales to help businesses make good choices, not to be pushed to overcharge employers. As one broker explained, “people think we’re independent, I even think that sometimes, but I often feel like a hired salesman for one insurance company. You wouldn’t ask a Ford salesperson if you should buy a Honda.”

  Most of us would respond to similar market forces the same way. Think about it in a different context. Imagine you’re an elementary school student and you told every kid in your school that you could get an ice cream vending machine in the school cafeteria, and by golly, one day there it is. They might hesitate when they see that you are getting 5% of every ice cream cone sale. But hey, you got them their ice cream, so they can’t complain. What they don’t know is that on top of that steady revenue stream, the ice cream supplier, every now and then, hands you a $100 bill.

  Everyone loves the ice cream, and you like the cash flow. You introduce the ice cream supplier to four other schools in your town and quintuple your monthly commissions. All this for brokering a one-time agreement between each school and the vending machine company. You become known as the ice cream vending machine industry expert. But now a few students at the first school start to complain because the ice cream supplier doubled the prices. They think they might be able to pay less for ice cream if they went to a competitor. But you’re the ice cream expert, so they come to you and ask about changing suppliers.

  You tell your supplier the other kids aren’t happy, but they won’t work with you. They say if you go to a competing company they will cut your commission at all five schools. They’ll fire you as the broker. What would be a rational economic response?

  You would probably urge the unhappy kids to stick with the current supplier. You might resort to some trusted sales retention tactics. You might tell people they’re getting higher quality ice cream from the current supplier, so it’s worth the price. You might tell them a nightmare salmonella story about a person who ate a competitor’s ice cream. You might explain that it costs more to start over with a new supplier than it does to stick with what they’re paying. Your willingness to float such rumors would likely roughly correspond to the amount of money on the table. If it’s just $1, you might say goodbye to the pricey supplier. If it’s $1,000, that’s a lot of bubble gum at stake. And if it’s $10,000, you’re in the money for a car when you turn 16. You might do whatever it takes to maintain the status quo.

  This make-believe ice cream broker is analogous to a health insurance broker, but in health care there’s a ton of money on the table. I met brokers who made hundreds of thousands of dollars a year for simply ensuring that their “ice cream vending machines” stayed in the “schools” despite surging prices. Where does the health insurance company get the money to pay the brokers so well for so long? They build it into the price of health insurance. In other words, that money comes from you.

  The brokers told me they have as many as 17 different revenue streams from health insurance companies or pharmacy benefits managers. Some are never disclosed to the employer. This lack of disclosure is more common the smaller the employer. Sometimes the kickbacks go to a brokerage firm that employs brokers. That creates intense internal pressure at the firm to keep a book of business. Some brokerages spend their entire base commission on their business expenses and rely on bonuses as their sole source of profit.

  This system is akin to the days when stockbrokers were told to sell 10,000 shares of a particular stock no matter what it took, with major repercussions for not meeting the target. The “I don’t care how you do it, just do it” approach from supervisors leads to mischief and deception. Just ask Wells Fargo, where internal corporate pressure resulted in bankers’ crossing the line and opening empty accounts in clients’ names without their consent. That scam led to a $142 million settlement and a huge loss of credibility for the bank. The executives claimed they did not know. “I do want to make very clear that there was no orchestrated effort, or scheme as some have called it, by the company,” said the Wells Fargo CEO. But bank employees said they were pressured to meet unrealistic sales goals,1 that they opened bogus accounts so they wouldn’t lose their jobs.2 Turns out they lost their jobs anyway. Wells Fargo fired 5,300 employees for opening sham accounts to meet sales targets. When I talk to captains of the health insurance establishment, they make the same arguments, telling me that they do not put pressure on brokers. But the brokers on the ground tell a different story.

  As I spoke with more brokers I realized how stressful their job is, with the bullying and bonus lures from health insurance companies. Sure, scoring three large employers could mean $100,000 to $200,000 in bonuses each year, along with a hefty commission on the premiums. But there’s midlife-crisis-level stress when an employer calls to say “Hey, I want to reevaluate our health insurance options.”

  Why don’t employers get educated and demand full transparency for what they are buying? Well, some do, but it’s hard. It’s challenging to compare health insurance benefits. It’s ten times harder to interpret the pharmacy benefits—which are a whole ’nother shell game altogether.

  As a physician, I was shocked at the business of how health insurance is sold to businesses in America; I couldn’t believe what I was hearing. This is the way health care is sold in America? I didn’t even know there was such a thing as a broker who sold health care to employers. What they were really selling was access to physicians like me. And this is how the business was conducted?

  We suffered the financial crisis of 2007 in part because people were buying and selling products they didn’t understand. Retirement plans were buying collateralized debt obligations (CDOs) even though no one had any idea what assets they contained. The market was too complicated for anyone to deconstruct. Employers have similar problems understanding the health insurance products they purchase. They are designed to be complicated so employers won’t try to figure out where their money is going.

  The similarities to the subprime mortgage crisis are striking. Back then, mortgage brokers were paid bonuses for putting people into subprime mortgages they couldn’t afford. Both mortgage brokers and health insurance brokers were selling their clients products they didn’t understand. The main difference was that after the global recession, the government cleaned up the mortgage broker business. The health insurance broker business, on the other hand, has never faced a reckoning.

  I flew back to Johns Hopkins from the Orlando health insurance broker conference and asked doctors on our staff whether they knew how our services were sold. None did. I asked ten doctors: Have you ever heard of a health insurance broker? All said “no.” Nor did any of them know how health insurance was sold in the United States. I was struck by the disconnect between those who deliver health care and those who sell it. It reminded me of what Senator Bill Frist, who is also a surgeon, said to me the day we met. Frist said doctors are educated in medic
ine but not in health care. I was seeing afresh how right he was.

  Brandon Luckett

  As I got to know insurance brokers around the country and started to get my head around their business, it was hard to believe how big a business it was. Nearly half of the nation’s businesses buy insurance from brokers. In the Baltimore area alone, there are nearly a thousand brokers. Of the many I met, I noticed they often had strong sales skills, some were great golfers, and all were super friendly.

  I realized that one of my friends, Brandon Luckett, is in the business. He’s executive vice president of the benefits advising company Employee One.

  I drove to Columbia, Maryland, to meet him for lunch at a famous Indian restaurant. I told Brandon what I had learned: the good, the bad, and the ugly side of the business. As I spoke, he appeared to agree. At one point, he interrupted.

  “We took no bonuses last year,” Brandon said about his company’s relationship with insurance carriers.

  “But don’t most brokers get paid with bonuses?” I asked him.

  “Yes, but we want to be different.”

  Whenever possible, Brandon gets paid a flat fee for his services based on the number of employees in a particular plan. The traditional commissions lead to higher health insurance costs, he said. They don’t allow the broker to be a strong advocate for the employer, he added.